Windows Puts Microsoft 2 Steps Ahead, Xbox 1 Step Behind

Microsoft reported higher than expected earnings Thursday, with Windows 7 license sales up despite the company's plan to release a new version of its desktop operating system later this year.

The company's PC division gained 4 percent from a year ago, earning US$4.6 billion in revenue. The gain was in part thanks to an uptick in businesses buying Windows 7 licenses, Microsoft said. Forty percent of enterprise desktop PCs worldwide now run on Windows 7, the company stated.

Overall, Microsoft posted revenue of $17.41 billion for its third fiscal quarter, a 6 percent jump from the year before. Its reported net income of $5.1 billion, or 60 cents per share, compared to $5.23 billion a year ago.

The Entertainment and Devices division at Microsoft, which claims Xbox, Windows Phone and Skype, reported revenue of $1.62 billion, a loss of 16 percent. It also saw a $229 million operating loss, while a year ago it reported a $210 million profit. A steep drop in Xbox sales was partly to blame, although Microsoft reminded investors that the Xbox is still the top-selling console in the U.S.

Lucky No. 7

Microsoft's relatively strong showing in Windows licenses for PCs was especially good news for the company. Various industry leaders, including Apple CEO Tim Cook, have speculated that the rapid ascent of tablet devices such as the iPad and growing reliance on smartphones is taking a chunk out of the market. Microsoft's earnings revealed that there is still a demand for the company's core product, said Colin Gillis, an analyst at BGC Partners.

"The whole notion that the PC market is dying is overdone," Gillis told the E-Commerce Times. "They're selling a million PCs a day."

Though Microsoft has held fast in the PC sector, it's had less success in mobile markets such as tablets and phones. That could change when Windows 8, the revamped operating system, makes its debut.

The company hasn't announced an official release date for the product but has said it should be out by late this year. The company has already released a public beta of the OS for PCs.

Windows 8's interface is intended to be more easily applied to touch products like tablets, but Thursdays earnings suggest Windows 7 hasn't been forgotten in the run-up to its eventual replacement.

"Microsoft isn't really banking on Windows 8," said Gillis. "They're refreshing a product line. To say they're really banking on Windows 8 for business to improve isn't fair to 7. Forty percent of PCs are running on 7, and there are still plenty of opportunities for it, even while the current refresh continues."

Enterprise is crucial to the continued growth of Windows 7, but the earnings also showed businesses are still content with Microsoft in other areas, said Gillis. The Server & Tools business had a 14 percent increase from a year before, reporting a $4.57 billion revenue on the quarter.

"IT managers say they're the leader in cloud computing, and they're quickly growing in service and tools," said Gillis.

Entertainment Down

In previous quarters, Microsoft had been able to rely on Xbox 360 and Kinect, a sensor device for gaming, for solid gains. Recently, though, the gaming market has made larger strides in mobile areas.

Microsoft sold 1.4 million Xbox consoles in the first three months of the year, a 48 percent drop from a year ago. For customers still looking to play on a console, though, most aren't looking any further than the Xbox 360.

"Xbox is getting a little old, but it's still the No. 1-selling gaming console," said Gillis. "And it's been that way for 15 months straight."

Microsoft acknowledged that the console market is currently weak, but it said its new content partners and experiences for Xbox Live members would keep the product a top seller. Recent moves to provide television entertainment through the Xbox 360 indicate Microsoft is positioning the device as a more centralized entertainment console rather than something used only for gaming.

"The console generation is really old," Ted Pollak, senior gaming analyst at Jon Peddie Research, told the E-Commerce Times. "Gaming is limited, and there are so many choices with connected living room experiences that this form factor is on its way out."